Ignition-Switch Claimants Attack GM’s Bankruptcy Shield

General Motors Co. customers whose vehicles dropped in value after the automaker was forced to admit that millions of vehicles had a serious safety defect. The Plaintiffs in a lawsuit are contending that GM’s bankruptcy does not stop them from suing what is now referred to as “New GM” for damages. In a brief filed in New York bankruptcy court, the Plaintiffs objected to GM’s attempt to use a court order from its bankruptcy to defeat the class actionlitigation spawned by a the publicized ignition-switch defect that was found to have “infected” millions of vehicles. Steve Berman of Hagens Berman Sobol Shapiro, a lawyer representing the class plaintiffs, said in a statement:

GM continues to keep consumers from receiving the remedy they deserve. When standing before the American people, GM claims to take responsibility, but in the courtrooms of America, it seeks the opposite, attempting to evade responsibility for its illegal acts.

The Plaintiffs filed their brief in the court for the Southern District of New York. U.S. Bankruptcy Judge Robert Gerber. The so-called New GM emerged from Chapter 11 in 2009 and purchased the good assets of GM, but not the liabilities, of the pre-bankruptcy company. GM is now trying to use the bankruptcy order against the Plaintiffs in some 130 lawsuits pending in the Southern District of New York that seek to compensate drivers for the diminished value of their cars following a series of massive recalls this year.

At issue before Judge Gerber in August was what exactly GM executives knew while the company was reorganizing and whether they knowingly suppressed crucial information about the defect in order to facilitate the company’s exit from Chapter 11. The automaker has denied concealing the scope of its potential liability from the ignition switches, insisting that higher-level leaders, including general counsel Michael Millikin, were kept in the dark about the defect until recently. In their reply, the Plaintiffs argue in the bankruptcy court that the sale order cannot function as a “get out of jail free card” that shields GM from the very misconduct it covered up. This appears to be a battle GM can’t win.

Upholding the bankruptcy shield, the Plaintiffs said, would be a “dangerous invitation to abuse the bankruptcy process,” encouraging other debtors to hide serious “legacy liabilities” during the reorganization process and leave them behind through bankruptcy sales. The plaintiffs said in their brief that they had known that the terms of the order would extinguish their rights, they would have objected to it.

If Judge Gerber rules for GM, the Plaintiffs could recover only from the “rump entity” that stayed behind to wind down GM’s “legacy liabilities” instead of from the reorganized entity, which has basically the same folks revising the company and took with them all of the good assets of the company.

The underlying suits against GM allege violations of state consumer protection statutes, breach of implied warranties, fraud by concealment, unjust enrichment and other claims over more than 60 recalls affecting GM-branded vehicles sold in the U.S. from model years 1997 to 2014. GM has spent much of 2014 dealing with the deadly defect, which affected millions of older vehicles in the Chevrolet Cobalt family. In Congressional hearings, GM executives had great difficulty trying to explain how the defect was allowed to persist for so long when engineers reported problems as early as 2004. The overwhelming evidence on that issue will destroy GM’s credibility with the judges involved in the litigation on several fronts.

U.S. District Judge Jesse Furman, who is presiding over the federal litigation against GM, has kept most of the consumer-fraud suits before him in a holding pattern until Judge Gerber has rendered a decision.

It’s most interesting to put this entire litigation into perspective. GM was forced to admit safety problems and to recall millions of cards because of a lawsuit filed in Cobb County, Georgia, by a courageous family (the Meltons) represented by Lance Cooper. The National Highway Traffic Administration should have done something long before the Melton case was ever filed, but the agency dropped the ball. Certainly, GM had a legal duty to report the defect years before the Melton case discovered the defect. Instead, GM covered up the defect, its knowledge of deaths and elected to run a tremendous safety risk.